Optimal policy design for industrialization in an open economy.

Economic integration has considerably increased the access of less de-veloped countries to markets in the North. Yet many countries have not been able to benefit from this potential for growth. Complementary poli-cies appear to be an important factor in determining the effect of openness on growth. The present paper explores the optimal industrial policy design for a less developed economy in an open economy. In particular, we focus on whether the policy should be targeted to a few sectors or more broad based and therefore more neutral. Our theoretical and empirical analysis shows that optimal policy design is a function of the degree of openness. More precisely, while limited foreign market access calls for selective in-dustrial policies, the optimal policy response to increased openness is to broaden these policies.